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By Roger Choudhury

Eventually, trust preferred stocks will not count as part of a firm's tier 1 capital due to Dodd-Frank. Many of these securities are high-yielding, and probably will be called away between 2013 and 2016. Issuers may reissue securities at lower yields, given the low interest rate environment.

I searched for high-yielding trust preferreds from well-known issuers. Here is what I found:

Bank of America (NYSE:BAC) (Fleet Capital Trust IX, 6% TruPS Trust Preferred Securities)

Recent Price

$23.97 per share

Callable?

Yes, at $25 per share, since Jul 2008

Dividends

$0.375 per quarter

Next dividend payment is on Aug 1

Record date is on Jul 31

Current yield (after-tax yield)

6.2% (4.0%)

S&P Rating

BB+

Ticker symbol (Yahoo! / Google / Fidelity)

FBF-PN / FBF-N / FBF/PN

This preferred is still paying out dividends. It was originally issued by FleetBoston Financial, which was acquired by Bank of America in April 2004. Bank of America's ratio of earnings to fixed charges and preferred dividends is 0.89. This is too low for comfort, but since 2007, the firm has cut fixed charges by 57.6% to $22.69 billion. Earnings have been trended well as of late. The company showed a smaller loss of $230 million in 2011, after being in the red for $1.323 billion in 2010. First quarter results also demonstrated a profit of $653 million, after a debit valuation adjustment. My conclusion is that the Bank should continue to pay out dividends over the next two years, at least.

Because of this preferred's defensive nature, after Friday's jobs report, the share price did not deteriorate by as much as the general markets. There continues to be a feeling of angst toward the global and domestic economic situation. In fact, German 10-year bunds are hitting all-time lows, and 10-year US Treasuries are yielding below 1.90%. As the markets continue to see gloomy economic data, the share price here may drop below $22 over the next couple of months. It may be wise to wait until then, but if you are seeking to collect dividends for the medium term, go ahead and buy in now. I recommend this for income investors with a medium risk profile, given the BB+ rating.

Continuing my thought process, I am not an optimist on the general markets. There are recessions in the UK and Spain. This will soon spread to other European countries. US economic growth is also slowing down. Essentially, China will suffer with growth dropping below 8%. The earliest that I can see this preferred rising back to $25 is sometime next summer. So, if you buy now and hold, you will earn a few dividend payments, and would have protected against a downside on purely equity holdings.

Citigroup (NYSE:C) (Capital XVII, 6.35% Enhanced TruPS Trust Preferred Securities)

Recent Price

$24.55 per share

Callable?

Yes, at $25 per share, since Mar 2012

Dividends

$0.396875 per quarter

Next dividend payment is on Jun 15

Record date is on Jun 14

Current yield (after-tax yield)

6.4% (4.2%)

S&P Rating

BB+

Ticker symbol (Yahoo! / Google / Fidelity)

C-PE / C-E / C/PE

Since 2007, Citigroup has made some progress to improve its ratio of earnings to fixed charges and preferred stock dividends, when it was 1.01. By the end of 2011, it was 1.59. Additionally, total fixed charges have declined by 67.6% to $16.045 billion. Another important data point to consider is the debt to equity ratio. This has fallen from 5.07 in 2008 to 1.82 in 2011. Also, look that tier 1 capital ratio. Citi has boosted it from 7.12% to 13.55% over the same period. In sum, at the very least, I think that the preferred's dividends should continue to be made over the next three years.

In the recently filed 10-Q, Citigroup stated that a hypothetical two-notch credit rating downgrade would impact Citigroup's funding and liquidity by approximately $2.1 billion due to derivative triggers and exchange margin requirements. Of the $2.1 billion, $0.5 billion could result from a potential two-notch downgrade by Moody's only. Basel 3 and Dodd-Frank requirements prompted these reviews by S&P and Moody's. In November 2011, S&P downgraded Citi's issuer credit rating by one notch to A-. In comparison, HSBC USA's (HBC) issuer credit rating fell one notch to A+. This was the case for several other banks across the industry.

I believe that this may place downward pressure on the share price. There's already such pressure due to the impending economic downturn in the US. I believe that a good entry point would be in the next couple of weeks, if you are eager to shift away from equities to more fixed-income. Next week, the key economic numbers to watch are Germany's industrial figures on Tuesday and the US initial jobless claims on Thursday. Depending on how poor the data are, you should be able to gauge when to get in. Exceptionally bad numbers would mean that the share price should tumble below $24.30. So-so numbers would probably mean that this trades sideways. In any event, retirees should stay away from this, and seek investment-grade products. Investors with a medium risk profile should only consider this preferred stock.

Zions Bank (NASDAQ:ZION) (Capital Trust B, 8% Capital Securities)

Recent Price

$25.63 per share

Callable?

Yes, at $25 per share, since Sept 2007

Dividends

$0.50 per quarter

Next dividend payment is on Jun 1

Record date is on May 31

Current yield (after-tax yield)

7.8% (5.0%)

S&P Rating

BB

Ticker symbol (Yahoo! / Google / Fidelity)

ZB-PB / ZB-B / ZB/PB

The company's ratio of earnings to fixed charges and preferred stock dividends was below one between 2008 and 2010, but was 1.33 at the end of 2011. Fixed charges have declined by 46.6% to $726.6 million. The firm has also kept its debt to equity ratio in check since 2002, with it being below one for that time. It is currently 0.42.

Zions Bank also returned to profitability in 2011 for the first time since 2007. First quarter results posted profits of $25.5 million and a tier 1 capital ratio of 14.81%. Given these important bits of information, I would say that preferred dividends should continue to be paid out over the next few years.

Over the next couple of weeks, I believe that this should slide below $25.50. It is true that this is high-yielding, but concerns of declining revenues should ultimately push the share price lower due to lower economic activity. Yet, I do not see this going below $25 anytime soon.

Yes, this trades above par value, but after collecting two dividend payments, you should make up for a future call. Moreover, after factoring in the taxation of dividends as ordinary income, there remains a modest yield. I recommend this to investors with an aggressive stance, but are looking to hedge against the likely downturn in the equity markets.

For investors with a medium risk profile and a regional bank preference, consider the Key Bank (NYSE:KEY) Capital X, 8% Enhanced TruPS Trust Preferred Securities. It has an investment grade rating of BBB-, and currently yields 5.0% after-taxes. The next dividend payment is on June 15.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 3 High-Yield Preferreds Paying 6%+ Now